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Types of Accounts

and Journal
JournalRaghvir Kaur

Accounting Cycle

The first step in the process is to identify external transactions affecting the

accounting equation.
A mechanism is needed

about each transaction. Source documents


relay essential information about each transaction to the accountant,
e.g., sales invoices, bills from suppliers, cash register serve this need.

With this information, the next step in the processing cycle, transaction

analysis process of reviewing the source documents to determine the dual


effect on the accounting equation and the specific elements involved., can
be accomplished.

The third step in the process is to record the transaction in a

journal a chronological record of all economic events


affecting financial position.
Each journal entry is expressed in terms of equal debits and

credits .
Debits and credits represent increases or decreases to specific

accounts, depending on the type of account.

Next step is to periodically transfer or post the debit and credit

information from the journal to individual ledger accounts.


This process is called posting . Posting involves transferring

debits and credits recorded in individual journal entries to the


specific accounts affected.

A ledger is simply a collection of all of the company's various

accounts. Each account provides a summary of the effects of all


events and transactions on that individual account.

Before financial statements are prepared, adjusting entries

(internal transactions) are recorded at the end of an


accounting period, an unadjusted trial balance a list of
the general ledger accounts and their balances at a
particular date. usually is prepared.

A trial balance is simply a list of the general ledger

accounts, listed in the order that they appear in the ledger,


along with their balances at a particular date.

Account
An account is a summary of the relevant transactions at one

place relating to a particular head. It records not only the


amount of transaction but also their effect and direction.

ABCs A/C
Date Particulars
F
Particulars
F Amt.

Amt. Date

Classification of Accounts
Personal Accounts : Accounts which are related to individuals, firms,

companies, co-operative societies, banks, financial institutions are known as


personal accounts. The personal accounts may further be classified into three
categories :
Natural Personal Accounts : Accounts of individuals (natural persons)
such as Akhils' A/c, Rajesh's A/c, Sohan's A/c are natural personal
accounts.
Artificial Personal Accounts : Accounts of firms, companies, banks,
financial institutions such as Reliance Industries Ltd., Lions Club, M/s
Sham & Sons, Punjab National Bank, National College are artificial
personal accounts.
Representative Personal Accounts : In certain cases (due to the matching
concept of accounting) the amount on a particular date, is payable to the
individuals or recoverable from individuals. Such accounts are classified as
representative personal account e.g., Wages out standing account, Pre-paid
insurance account etc.

Real Accounts
Real accounts are the accounts related to assets/properties.

The accounts relating to tangible assets such as building,

plant, machinery, cash, furniture etc. are classified as


tangible real accounts.

Intangible

real accounts are the accounts related to


intangible assets such as goodwill, trademarks, copyrights,
patents etc.

Nominal Accounts

The accounts relating to income, expenses, losses and gains are

classified as nominal accounts. For example Wages Account,


Rent Account, Interest Account, Salary Account, Bad Debts
Accounts, Purchases Account etc. fall in the category of
nominal accounts.

RULES OF DEBIT AND CREDIT


Basically, debit means to enter an amount to the left side of

an account and credit means to enter an amount to the right


side of an account.
In the abbreviated form Dr. stands for debit and Cr. stands

for credit.
Both debit and credit may represent either increase or

decrease depending upon the nature of an account.

JOURNAL
Journal is a historical record of business transactions or events.

The word journal comes from the French word "Jour" meaning
"day". It is a book of original or prime entry written up from
the various source documents. Journal is a primary book for
recording the day to day transactions in a chronological order
i.e. in the order in which they occur. The journal is a form of
diary for business transactions. This is also called the book of
first entry since every transaction is recorded firstly in the
journal.

The format of a journal is shown as


follows :

(a) Date Column : This column shows the date on

which the transaction is recorded. The year and


month is written once, till they change.
(b) Particular Column : Under this column, first the
names of the accounts to be debited, then the
names of the accounts to be credited and lastly,
the narration (i.e. a brief explanation of the
transaction) are entered.
(c) L.F., i.e. Ledger Folio Column : Under this
column, the ledger page number containing the
relevant account is entered at the time of posting.
(d) Debit amount Column : Under this column, the
amount to be debited is entered.
(e) Credit amount Column : Under this column, the
amount to be credited is entered.

Meaning of Journalising
The process of recording a transaction in the journal is called

journalising.
Step 1 Ascertain what accounts are involved in a transaction.
Step 2 Ascertain what is the nature of the accounts involved.
Step 3 Ascertain which rule of debit and credit is applicable

for each of the accounts involved.


Step 4 Ascertain which account is to be debited and which is

to be credited.
Step 5 Record the date of transaction in the 'Date column'.

Step 6 Write the name of the account to be debited, very

close to the left hand side i.e. the line demarcating the 'Date
column' and the 'Particulars column') along with the
abbreviation 'Dr.' on the same line against the name of the
account in the 'Particulars column' and the amount to be
debited in the 'Debit Amount column' against the name of the
account.
Step 7 Write the name of the account to be credited in the

next line preceded by the word 'To' at a few spaces towards


right in the 'Particulars column' and the amount to be
credited in the 'Credit Amount column' against the name of
the account.
Step 8 Write 'Narration' (i.e. a brief description of the

transaction) within brackets in the next line in the 'Particulars


column'.
Step 9 Draw a line across the entire 'Particulars column' to

separate one Journal Entry from the other.

Advantages of Journal
1. The transactions are recorded in journal as and when they

occur so the chances of error is minimized.


2. It help in preparation of ledger.
3. Any transfer from one account to another account is made
through Journal.
4. The entry recorded in journal are self explanatory as it
includes narration also.
5. It can record any such transaction which cannot be entered
in any other books of account.
6. Every transaction is recorded in chronological order (date
wise) so the chances of manipulations are reduced.
7. Journal shows all information in respect of a transaction at
one place.
8. The closing balances of previous year of accounts related to
assets and liabilities can be brought forward to the next year
by passing journal entry in journal.

Practical Problem
From the following transactions of Nikhil, find

out the nature of accounts and also state


which account should be debited and which
should be credited :
i) Rent paid
ii) Interest received
iii) Purchased furniture for cash
iv) Machinery sold in cash
v) Outstanding salaries
vi) Paid to Surinder

Analysis of Transactions

Journalise the following transactions :


Jan. 1 Mohan started business with cash 80,000
Jan. 6 Purchased goods from Ram on credit

30,000
Jan. 8 Sold goods on cash 6,000
Jan. 15 Bought Furniture from Yash for cash
8,000
Jan. 18 Paid Salary to manager 6,500
Jan. 20 Paid Rent to land lord in cash 1,000

Compound Journal Entries


When more than two accounts are involved in

a transaction and the transaction is recorded


by means of a single journal entry instead of
passing several journal entries, such single
journal entry is termed as 'Compound Journal
Entry'.

Nov. 1 Paid to Arun Rs. 5,250 discount

allowed by him Rs.50


6 Received from Somesh Rs. 1,900 and
from Komesh Rs. 400
8 Goods purchased for cash Rs. 4,000
Furniture purchased for cash Rs. 3,000
Paid cash to Raman Rs. 2,090
Paid Salary in cash Rs. 7,600
Paid Rent in cash Rs. 1,400

Opening Entry
A journal entry by means of which the balances of

various assets, liabilities and capital appearing in


the balance sheet of previous accounting period
are brought forward in the books of the current
accounting period, is known as 'Opening Entry'.
While passing an opening entry, all assets
accounts (individually) are debited and all
liabilities accounts (individually) are credited and
the Net worth (i.e. excess of assets over liabilities)
is credited to Proprietor's Capital Account (in case
of a proprietary concern) or Partners Capital
Accounts (in case of a partnership concern).

Goods Account
In accounting the meaning of goods is restricted to

only those articles which are purchased by a


businessman with an intention to sell it. For example,
if a businessman purchase typewriter, it will be
goods for him if he deals in typewriter but if he deals
in other business say clothes then typewriter will be
asset for him and clothes will be goods.

Sub-Division of Goods Accounts


The goods account is not opened in accounting

books. In place of goods account the following


accounts are opened in the books of accounts :
Purchases Account : This is opened for goods purchased on cash

and credit.
Sales Account : This account is opened for the goods sold on

cash and credit.


Purchase Returns Account or Return Outward Account : This
account is opened for the goods returned to suppliers.
Sales Returns Account or Return Inward Account : This
account is opened for the goods returned by customers.

IMPORTANT CONSIDERATIONS FOR


RECORDING THE BUSINESS TRANSACTIONS
Trade Discount
Trade discount is usually allowed on the list price of the goods. It

is not recorded in the books of account and entry is made only


with the net amount paid or received. For example purchased
goods of list price Rs. 8,000 at 15% trade discount from X.
Cash Discount
Cash discount is a concession allowed by seller to buyer to

encourage him to make early cash payment.


The person who allows discount, treat it as an expense and
debits in his books and it is called discount allowed and the
person who receives discount, treat it as an income and it is
called discount received and credited in his books of account as
"Discount Received Account." For example, X owes Rs. 6,000 to
Y. He pays Rs. 5,950 in full settlement against the amount due.

Goods distributed as free samples


Some times business distribute goods as free samples for

the
purpose
of
advertisement.
In
this
case,
Advertisement Account is debited and Purchases Account
is credited. Goods costing Rs. 8000 were distributed as
free sample.
Interest on capital
Interest paid on capital is an expense. Therefore interest

account should be debited. On the other hand the capital


of the business increases. So the capital account should
be credited.
Interest charged on Drawings
If the interest is charged on drawings then it will be an

increase in the income of business, so interest on


drawings will be credited. To record this, following entry
will be passed :
Drawing Account/Capital Account
Dr.
To Interest on Drawing Account

Depreciation charged on Fixed Assets


Depreciation is the gradual, permanent decrease in the

value of an asset due to wear and tear and many other


causes. Depreciation is an expense so the following
entry will be passed :

Depreciation Account Dr.


To Asset Account
Bad Debts
Sometimes a debtor of business fails to pay the amount

due from him. Reasons may be many e.g. he may


become insolvent or he may die. Such irrecoverable
amount is a loss to the business. To record this following
entry will be passed :

Bad Debts Account Dr.


To Debtor's Account

Bad Debts Recovered


When any amount becomes irrecoverable from any costumer or

debtor his account is closed in the books. If in future any amount


is recovered from him then his personal account will not be
credited because that does not exist in the books. So the
following entry is passed :

Cash Account Dr.


To Bad Debts Recovered Account
Purchase and Sale of investment
When business has some surplus money it may invest this

amount is shares, debentures or other types of securities. At the


time of sale of investment the sale price of an investment is
recorded in the books of accounts. The following entry is passed
to record the purchase of investment :

Investment Account Dr.


To Cash Account
In case of sale of these securities the entry will be :

Cash Account Dr.


To Investment Account

Loss of Goods by Fire/Accident/theft


A business may suffer loss of goods on account of fire, theft

or accident. It also reduces the goods at cost price, and


increases the loss/expenses of the business. The entry will
be passed as :
Loss by fire/Accident/theft Account Dr.(for loss)
Insurance Company Account Dr. (for insurance claim admitted)
To Purchases Account
Income Tax Paid
Income Tax paid should be debited to Capital Account or

Drawings Account and credited to Cash Account in case of


sole proprietorship and partnership firms. The reason
behind this is that income tax is a personal expense for the
sole trader and partners because it is paid on income of
proprietor. The entry will be as follows :
Capital Account/Drawing Account Dr.
To Cash Account

Paid wages/installation charges for

erection of machinery
Machinery Account Dr.
To Cash/Bank Account
Sale of Asset/Property
When the asset of a business is sold, there may
occur a profit or loss on its sale. Its journal

entry is :
(i) In case there is a profit on sale of

Property/Assets
Cash/Bank Account Dr.
To Asset/Property
Account
To Profit on sale of
Asset Account

Drawings Account
It is a personal account of the proprietor. When the

businessman withdraws cash or goods from the business


for his personal/domestic use it is called as 'drawings'.
Drawings reduce the capital as well as goods/cash
balance of the business. The journal entry is :
Drawings Account Dr.
To Cash Account
To Purchases Account
Personal expenses of the proprietor
When the private expenses such as life insurance
premium, income tax, home telephone bill, tuition fees
of the son of the proprietor etc. are paid out of the cash
or bank account of business it should be debited to the
Drawings Account of the proprietor.